Is Tibet Tianlu (SHSE:600326) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Tibet Tianlu Co., Ltd. (SHSE:600326) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tibet Tianlu

What Is Tibet Tianlu's Net Debt?

The image below, which you can click on for greater detail, shows that Tibet Tianlu had debt of CN¥4.12b at the end of September 2024, a reduction from CN¥4.88b over a year. On the flip side, it has CN¥2.62b in cash leading to net debt of about CN¥1.50b.

How Healthy Is Tibet Tianlu's Balance Sheet?

The latest balance sheet data shows that Tibet Tianlu had liabilities of CN¥4.93b due within a year, and liabilities of CN¥2.11b falling due after that. Offsetting this, it had CN¥2.62b in cash and CN¥3.81b in receivables that were due within 12 months. So its liabilities total CN¥617.7m more than the combination of its cash and short-term receivables.

Since publicly traded Tibet Tianlu shares are worth a total of CN¥8.27b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tibet Tianlu's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tibet Tianlu made a loss at the EBIT level, and saw its revenue drop to CN¥3.3b, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

Not only did Tibet Tianlu's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥240m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥333m into a profit. So to be blunt we do think it is risky. For riskier companies like Tibet Tianlu I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.